PensionsMar 20 2013

Gov’t hikes NI contributions for DB pension savers

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From 2016, employees in defined benefit schemes will pay more national insurance than they currently do due to the closure of the state second pension as a consequence of the single tier state pension system, the chancellor annnounced today.

In today’s Budget (20 March), George Osborne, chancellor of the Exchequer, said that as everyone will have access to the same single tier state pension of £144 a week, the ability for members of DB occupational pension schemes to ‘contract out’ of the state second pension will end. They and their employers will therefore no longer be entitled to pay a lower NIC rate and will end up paying a higher rate.

As an example of how it worked, Mr Osborne explained that someone who is currently 40 years old and is contracted out will pay £6,000 more in national insurance and get £24,000 more in their state pension.

Mr Osborne said that the higher employer NIC revenue that arises from the end of contracting-out for members of DB schemes will help cover the costs of social care reform for the duration of the next Parliament.

As the single-tier state pension will begin in 2016-17, Budget 2013 announces that the government will introduce a £72,000 cap on reasonable care costs and extend the means test from April 2016.

Mr Osborne also said more needs to be done on the regulation of DB pensions as recent economic conditions have put companies sponsoring DB schemes “under significant financial pressure”.

As a result, the government will provide The Pensions Regulator with a new objective to support scheme funding arrangements that are compatible with sustainable growth for the sponsoring employer and fully consistent with the 2004 funding legislation.

The precise wording of this new objective will be set out in legislation that the Department for Work and Pensions will publish later in spring 2013. Implementation of the new objective will be subject to review after six months and TPR will revise is Code of Practice to reflect their forthcoming new objective as soon as possible in 2013.

The Government is also consulting on a new growth duty for non-economic regulators and is attracted, subject to the results of that consultation, to applying such a new duty to TPR.